Objectives of Material Management System of M/s R.B Rai:- To study the supply logistics: Procurement and Materials To study Demand side logistics: Forecasting and Order Processing To study Inventory Management and Control To study storage facilities, Material handling equipment and packaging Physical distribution transportation system To study Change and transformation To study building responsiveness To study Faster innovation and creativity
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Objectives of Material Management System of M/s R.B Rai:-
To study the supply logistics: Procurement and Materials
To study Demand side logistics: Forecasting and Order Processing
To study Inventory Management and Control
To study storage facilities, Material handling equipment and packaging
Physical distribution transportation system
To study Change and transformation
To study building responsiveness
To study Faster innovation and creativity
INTRODUCTION OF MATERIAL MANAGEMENT SYSTEM
Materials management is the branch of logistics that deals with the
tangible components of a supply chain. Specifically, this covers the
acquisition of spare parts and replacements, quality control of purchasing
and ordering such parts, and the standards involved in ordering, shipping,
and warehousing the said parts.
It is a system of organizations, people, technology, activities, information
and resources involved in moving a product or service from supplier to
customer. Supply chain activities transform natural resources, raw materials
and components into a finished product that is delivered to the end
customer. In sophisticated supply chain systems, used products may re-
enter the supply chain at any point where residual value is recyclable.
Supply chains link value chains. Quality control is a process by which
entities review the quality of all factors involved in production. This
approach places an emphasis on three aspects:
1. Elements such as controls, job management, defined and well
managed processes performance and integrity criteria, and
identification of records
2. Competence, such as knowledge, skills, experience, and
qualifications
3. Soft elements, such as personnel integrity, confidence, organizational
culture, motivation, team spirit, and quality relationships.
The quality of the outputs is at risk if any of these three aspects is deficient
in any way.
Quality control emphasizes testing of products to uncover defects, and
reporting to management who make the decision to allow or deny the
release, whereas quality assurance attempts to improve and stabilize
production, and associated processes, to avoid, or at least minimize, issues
The activities of sourcing, procuring and holding in readiness the raw
materials, components, sub-assemblies and packaging materials used by
manufacturing enterprises for production traditionally came under the
control of the executive responsible for production. From the early 1950s
through to the 1970s, production executives wielded considerable power
and authority in western manufacturing enterprises. These enterprises
focused on economical production, which often involved long production
runs of finished goods inventory.
In part, this was due to the difficulty of scheduling and controlling production
with mainly manual or rudimentary computer systems. Also, a focus on
lowest cost per unit of production dominated management thinking.
Frequently, this resulted in the cost of holding large finished goods
inventories being ignored or considered to be someone else's problem.
During the 1970s, improvements in mainframe computing power and the
introduction of smaller and cheaper mini-computers made the production-
planning task easier. Planning techniques such as Materials Requirements
Planning (MRP) and later Manufacturing Resource Planning (MRPII)
provided greater materials visibility to those charged with planning and
control of the production process. It also provided a relatively efficient
means of matching production requirements with finished goods inventories
and forecasts of customer demand for finished goods.
CHAPTER – 1
SUPPLY LOGISTICS: PROCUREMENT AND MATERIALS
1.1 Purchasing and procurement is the broad process that buys the
materials or services necessary for the organization’s production function to
meet customer requirements. Included in the process are activities like
identifying various suitable suppliers, purchasing from them, and monitoring
their performance. While this is defined very neatly in a few words, the
actual stages of the process can be quite extensive. For example, the
stages involved may include:
• identifying needs
• defining requirements for purchasing
• deciding if purchase is necessary or best option
• decide if purchase is to be existing commodity or made specifically.
• studying the market for suppliers and their market power; i.e., is the
market supplied by one, few or many suppliers
• listing all available suppliers
• selecting potential suppliers
• appointing suppliers
• receiving commodity or service
• Evaluating commodity or service received.
1.2 Warehousing and Storage
Warehouses are, typically, one storey facilities allowing for receiving,
storage, order picking and shipping of goods, providing at the same time
office and related space. They have an effective storage plan, use efficient
material handling equipment and information systems and make maximum
use of the height of the building.
Warehousing and storage can vary widely in what they provide, depending
on the commodity stored. On the one hand, there is the storage of iron ore
or coal. On the other, there is the warehousing of temperature and climate
sensitive goods such as foodstuffs, computers and pharmaceuticals. In the
logistics context, warehouses are points on the logistics chain where
commodities or goods are held before they are used in the next process or
consumed. Warehousing happens on both sides of the production function.
Raw materials can be stored in warehouses prior to use in manufacturing;
and finished product can be stored in warehouses before distribution to
retail outlets and other customers.
Figure 1 Warehousing and storage are usually required on both sides of
the production equation.
The main functions of warehousing or storage are:
• consolidation for onward transport
• product mixing for specific customer orders
• cross-docking (transferring goods from one to the other through the
warehouse) between suppliers and consumers
• Contingency stocks to overcome delays or peaks and troughs in the
normal transport chain.
Warehousing and storage costs can be quite high, depending on the level
of inventory that is being maintained and the nature of the material being
stored. Generally, the more valuable or perishable the commodity, the
higher are the costs. Organizations aim to reduce their costs as much as
possible. This is the main motivation to use JIT supply of goods for
production purposes.
The relationship between the level of inventory maintained and the amount
of transportation used is direct: the greater the amount of transportation, the
less need for inventory, and vice versa. The level of inventory is then
related to the amount of warehousing that is used. There are obvious trade-
offs to be considered.
If the inventory is required to be high, perhaps through unpredictable
delivery schedules or long distance of delivery, warehousing capacity and
usage has to be high. Warehousing costs go up with increased inventory
holding. At the same time, there are economies of scale in maintaining
large warehouses. Two warehouses of 50,000 square meters are more
expensive to operate than one of 100,000 square meters.
On the other hand, an increase in the number of warehouses would allow
an increase of production and a reduction in transport costs, reducing
overall costs. These costs will decrease as long as the inventory costs
remain lower than the cost of increased warehousing. Once that point is
reached, increasing the number of warehouses will result in an increase of
total costs.
This argument works effectively in reverse as well. Reducing warehouses
can also contribute to reducing overall costs through economies of scale
and focused transport movements. Better transport results in reduced
inventory costs.
The decision on the number of warehouses that a firm maintains depends
on the level of service it requires. If the warehouses are used for holding
goods that are then called upon to service customers quickly, particularly
those who require shipments in various locations and in small quantities, a
number of warehouses are obviously cost-effective. Another situation in
which large number of warehouses is recommended is when customers do
not allow sufficient lead time or demand is erratic.
1.3 Data and information System
The materials manager needs information like the identities of suppliers that
the organization uses, demand forecasts for production, existing and
desired inventory levels, production timetables or schedules and transport
routing. This mass of information cannot be beneficially processed without
the use of suitable systems. Numerous software packages are available for
specialized usage, tailored for specific branches of various industries. The
main benefit of modern and powerful packages is that they permit the
linking and using of information from different aspects of the material
management function.
The main issues in any management information system are the availability
of relevant information, its accuracy and the effective communication of this
for management purposes.
To provide ever increasing levels of customer service, organizations
depend on information, increasingly in real time, about their operations and
the location of the customer's consignment. From the organization’s own
perspective, data and information systems must serve useful corporate
aims like permitting inter- and intra-functional communications, processing
data into useful information, supporting the output of personnel in the
organization, creating a useful and easily accessible archive of information
and permitting the development/improvement of processes that constitute
the business. From the logistics perspective, the most important issue
remains being able to meet the needs of the customer in the pre-
transaction, transaction and post-transaction stages, support sales and the
accounting and finance functions.
Various information systems technologies are available today. These
include bar coding, electronic data exchange (EDI), data management
(including CD-ROM), artificial intelligence and expert systems and satellite
tracking.
1.4 Information systems in material management
Fundamentally, this is a system that links together the people, procedures
and the operations and provides pertinent information to the relevant
managers to support decision making. The main elements of the logistics
function can broadly be identified as materials management, market
information collection, management information and support systems, and
documentation. Good computer technology is essential to the effective use
of all these systems. Corporate management systems are incrementally
being amalgamated with logistics systems to provide effective overall
management. You can expect to see increasingly sophisticated information
systems being designed to:
• supply knowledge of customer needs and expectations
• reduce lead time in the performance of a service or in filling orders
• enhance the quality of data collected and information generated.
At the same time, there will be an emphasis on:
• developing employee acceptance of the new technology in order that
can be used effectively
• Constructing crosses functional and cross discipline teams in order to
enhance business performance.
Total quality management (TQM)
Short lead times to meeting the customer's orders have put a strong
emphasis on the production process in all areas of the organization. Most
attention has been focused on areas that have direct dealings with the
customer, such as transport. Leading logistics providers, like FedEx and
UPS, are making pick ups and deliveries in less than an hour from
notification. This impact on all parts of the organization in planning and
providing a highly responsive and reliable service. While internal systems
are being analyzed and refined, many organizations are turning to third
party providers who can meet specific requirements more cost effectively.
Quality Assurance
Quality assurance is today synonymous with the ISO 9000 series of
standards published by the International Organization for Standardization,
often incorrectly referred to as International Standards Organization, in
Geneva, Switzerland. These standards are used to control processes within
the firm as well as to demonstrate to others that there is a formal system for
developing, sustaining and managing the quality of the output.
1.6 Measurement and evaluation
Like all other processes, materials management must have proper systems
of control and measurement. To be able to control the process, it must be
properly measured. The firm must be able to collect data, identify each
stage of the process and make improvements. Typically, the stages to
identify and measure include:
• supplier performance, including the number of items
accepted/rejected, types of defects, efficiency of delivery
• inventory levels and inventory turn over, use of different types of
transportation
• material costs over time, comparing actual expenditure with forecast
spending, price effectiveness, cost savings and cost avoidance, new
work generated, work completed
• quality of supplier and finished product.
In the process of measurement, three critical variables exist. These are:
• the source and reliability of data
• the use of the data to generate useful information
• the purpose to which the data and information is being put.
The source and reliability of data is an important issue. Broadly, data can
be divided into two kinds - soft (personal service and customer satisfaction
ratings, for example) or hard (for example, product availability). Firm can
develop links and control variables that can impact on performance. These
can include differentiating between customer types, products, markets and
so forth.
1.7 MRP 1 and MRP 2
There are two kinds of MRP and the difference between them is important
to understand. MRP1 is materials requirements planning and MRP2 is
manufacturing resource planning. MRP1 is a production and inventory
control system that seeks to minimize inventories but retain sufficient
material for the production process. In addition, it helps in the planning of
manufacturing activities, delivery schedules and purchasing. When
production does not follow a constant pattern, e.g., when production is to
order, and demand for material is highly variable, MRP1 can improve
business results. The elements of MRP1 are shown in Figure 2
Figure 2 The MRP1 system
The disadvantages of the MRP1 system are obvious: It focuses on
reducing inventory, which can, in turn, raise total costs through increased
transport needs and unavailability of bulk discounts; and it does not cater
for supply interruptions.
MRP2 encompasses the whole range of activities involved in the production
process. In addition to the elements of MRP1, it has production planning,
resource planning, MRP1, shop floor control and purchasing. The system
was developed first by Oliver Wight and he classified it into four groups:
The benefits of the MRP2 system are again along the lines of those for
MRP1. They include inventory reduction, higher inventory turnover,
improved customer service, and reduction of costs. The following reading
discusses these systems and links them back to TQM.
CHAPTER – 2
DEMAND SIDE LOGISTICS: FORECASTING AND ORDER
PROCESSIONG
2.1 Customer Order Processing
Order processing is the core of logistics activity. The receipt of the customer
order is the trigger that sets into motion all the logistics functions that
culminate in the delivery of the product to the customer. Of prime
importance to good order processing is a good flow of communications,
which binds the entire system together, supported by a suitable and
efficient management information system that allows the processing of
customer orders as well as collecting relevant information for management
decision making.
For Example:
As far as the firm is concerned, the time to fulfill the customer's order is
from the time the order is received and entered into their system till the time
it is shipped. From the customer's perspective, the time to fulfill the order is
from the time the order is sent till the time product or service is received.
2.2 Environmental scanning
Events and situations in the global, market or company environments will
have an impact on the efficient filling and dispatching of orders for
customers. Environmental scanning, therefore, is a logistics activity that,
done well, can enhance the order processing function. Moreover, such
events and situations can seriously affect all of the activities of a company,
and the logistics manager must be constantly aware of the nature of the
environment in which the business is operating and be ready to adjust
product movement as required.
2.2.1 The environments
The various environments, and their influences on operations, that the
logistics manager should be aware of include:
• the global, or macro, environment
• the competitive, or market, environment
• the firm, or micro, environment.
The global environment. The global environment is the one that sets the
tone for the wider operations of the industry. In recent times, the events of
September 11, 2001 have had a major impact on the global economy. This
influences the commercial activities of various organizations. Associated
with that has been the military and other activity in different parts of the
world, with knock-on effects on local enterprises.
For Example
In Australia , Ansett Airlines went bankrupt in October 2001. Coupled with
the effect of September 11 events, this had a major impact on different
industries. In Tasmania , tourism and seafood production suffered
particularly seriously. The double uncertainty of safety and lack of air
service kept many overseas holidaymakers away. The impact on the
hospitality and supporting logistics providers was severe. Many firms, such
as those that provided services and products to the airline as well as
downstream industries, ceased operations and/or went bankrupt. Others
laid off staff in large numbers and lost vast amounts of corporate
knowledge.
In other parts of the world, insurance premiums on cargoes to certain parts
of the world have been raised in response to perceived security of
operations. In addition, oil and commodity prices have varied in response to
market sentiments. All these and similar factors have a major influence on
the competitive environment within which firms operate.
2.2.2 Approaches to scanning
In the carrying out of the environmental scan, various approaches can be
adopted. Broadly, these may be listed as:
• formal research
• informal research
• casual information collection.
Formal research is carried out for a specific purpose with a specified
budget, following a predetermined plan and methodology, and with
outcomes in mind. Informal research is carried out in an unstructured way
but with a defined purpose. Casual information collecting on a topic or
areas is just that: it has no definition or structure and the information
collected is general rather than specific.
Finally, environmental scanning can be described as continuous, regular or
intermittent.
Information about the environment can be collected through various means,
including canvassing employees who interact with the customers, vendors
and sub-contractors or through consultants. Each of these will provide
information of different kinds, all of which should be used to substantiate or
counterbalance what is already known, as well as discover developments.
One of the important contributions environmental scanning makes is
towards making forecasts.
2.3 Logistics needs forecasting
In this section, we will succinctly discuss the importance of forecasting
logistics demand.
The need to know what quantity of any product or commodity will be
required is important because it affects all the processes involved in the
logistics chain, from
sourcing till consumption by the customer. For the purpose of logistics,
forecasting demand means defining all the requirements to make the
product reach the market. This includes forecasting the level of inventory to
be maintained, allocating money and material resources to various markets
that have to be serviced, and planning activities that will service the
demand. Underlying all this is the element of cost. While all the activities
named above must be carried out, that should be done at optimal cost.
In the context of logistics, forecasting is divided into three categories:
• Long range
Made for three or more years, these forecasts are strategic in nature.
They tend to be aimed at sections of the market and are linked to
capacity and cost. They usually address resource allocation and
identifying desired asset levels.
• Medium range
Made for between one and three years, these forecasts are usually
aimed at designing budgets and planning sales. They will also be
linked to cost but to specific products rather than market segments.
Most often, these forecasts tend to identify quarterly variables.
• Short range
Made for up to one year, these forecasts are operational in nature.
They address specific items and units.
2.4 Lead time components
From the perspective of the customer, lead time is the time between placing
the order and receiving the delivery. From the supplier's perspective, it is
the time between receiving an order and getting paid for it, that is, the
period for which cash is tied up, usually taken from the time materials were
purchased to produce the product to the time that the customer buys and
finally pays for. This concept is further explored in the following reading.
the purpose of defining lead time is, of course, to reduce uncertainty and
inventory (costs). For this reduction to be realised, variable demand as well
as demand that is consistent must be considered. When demand is
consistent, the lead time and quantity of product demanded are known.
Inventory needs to be maintained at cycle stock level . This means that if,
for example, the corner shop sells 20 pots of honey every fortnight,
regularly, then the beekeeper only needs to have 20 pots available every
fortnight. The lead time (fortnight) and demand (20 pots) is known.
No extra inventory needs to be maintained. When there is uncertainty in
demand or lead time, a safety stock needs to be maintained. The aim is to
cover short term variables that occur in demand or lead time.
2.5 Enhancing forewarning of demand
It is desirable to get as much forewarning as possible of customer's
demand to be able to bring the logistics lead time as close to it as possible.
There are two ways of doing this:
• Get information on customer needs faster, before orders are placed.
• Understand reorder points of customers, to pre-empt orders.
EPOS. This is seen to work very efficiently in various supermarkets where
electronic point of sale (EPOS) systems are installed. The electronic till is
linked to the inventory level and sensitive data monitoring identifies
customer behaviour. If articles are being purchased faster than normal,
reorder points are adjusted to prevent stock out situations. Getting such
information allows the supplier to be prepared for changes in orders and be
able to source supplies in time. Buyers and sellers both gain form the
exchange of such knowledge. The logistics system becomes much more
responsive. Markets are becoming more time and price sensitive. Both
sides of the demand have to be addressed - not just cheaper but also
quicker!
ERP. A more recent development has been the emergence of enterprise
resource planning (ERP). This system records all transactions, produces
and executes orders and follows payments. In other words, it can schedule
all procurement and distribution activities. ERP is based on computing and
IT for data collection and information processing. The databases required
for making the best use of the potential of ERP are enormous.
Organization-wide computing and data collecting functions are linked into
the system and this data can be shared with suppliers and customers.
One of the perceived shortcomings of ERP is that it can get too accounting
oriented, that is, companies can get too focused on the savings in money
terms rather than on wider improvements of operations. In addition, ERP
packages are often customized for specific organizations. This has a cost
attached to it, although the resulting savings may far exceed this initial cost.
The personnel who use this system will have to be suitably trained as well.
CHAPTER – 4
INVENTORY MANAGEMENT AND CONTROL
Introduction
At the outset, let us clarify some terminology. All firms hold stocks of some
goods that they keep in storage until needed. The level of stock held varies
from firm to firm but, on average, it would not be too inaccurate to say that
20% of the annual turnover would be the amount of stock a firm holds in
some sort of storage. As you can imagine, this can be a big investment.
Much work has been expended in trying to reduce this and to not have
capital tied up in stock which is not in the process of being turned to
income. The move is towards lower levels of stock and shorter lead times,
as discussed in the last chapter.
So, stock is goods that are held in storage until they are used.
To keep track of what is held in stock, an inventory is taken of all these
goods and their quantities. An inventory is, therefore, a list of all the stock
. Very often, however, the terms stock and inventory are used
interchangeably. We must understand the meaning of the terms quite
accurately, as well as the fact that they are used frequently to mean each
other. When we talk of inventory management, we are talking about
managing all the stock that is recorded in the inventory of a firm.
3.1 Basic concepts and rationale for inventory holding
Stockpiles of raw material, processed material, semi-finished material,
finished material, spare parts, consumables, etc. that appear at various
points in a logistics channel are termed inventory. Inventory holding is a
basic of business, as it is of life. We see inventory holding all the time.
Animals do it as a normal function of their lives. Humans do too. Weekly
shopping for food and other household needs is an example. We maintain a
stock of goods that we think we will consume in a certain period in the
future. The rationale includes standard consumption, abnormal
consumption through expected or unexpected visitors, and allow for
considered unforeseen events. As uncertainty increases, higher stocks
result and can be the strength of an organization in being able to meet
customer needs in such conditions. Benefits from holding inventory are that:
• supply and demand can be smoothed
• abnormal consumption can be accommodated
• irregular supplies can be accommodated
• savings can be made from large purchases
• savings are made when price increases are expected
• stockpiled products might not be produced any longer, but might still
be required occasionally in the marketplace
• there is a reduction in transport costs through bulk buying
• there is security at times of emergency.
Inventory is, therefore, integral to the generic cycle of logistics from
procurement to consumption:
• Place an order with a supplier.
• Take delivery when it arrives (after lead time, studied in previous
chapters).
• Check, sort and store.
• Internal demand draws upon this stock.
• When stock falls to re-order point, another order is placed.
Inventory is a cushion between the distribution and consumption processes.
It absorbs the lead time factor as well as any errors that may exist in the
forecasting process. Buying in bulk often leads to economies of scale and
cheaper quotes. Inventories also act as a balance between supply and
demand.
3.2 Inventory costs
Inventories, therefore, are useful tools in the logistics chain, and there are
good reasons for them being there. However, they must be carefully
managed, because they also represent a significant cost. Keeping low
inventories and risking a stock out can be very expensive, for example. A
stock out occurs when there is a buyer for an item but the item is no longer
available. Custom will be lost in these circumstances, perhaps never to be
regained.
On the other hand, inventories, although usually shown as assets, are,
nevertheless, money tied up in material which is sitting in stock, not being
processed or having value added, and not with the customer, earning
payment. Maintaining inventories of increasingly processed stock is
incrementally costly. The decision that a firm has to make is whether it is
worthwhile locking up this capital in stock or investing the same money
elsewhere to get better returns.
3.2.1 Managing inventory costs
'The benefits of smart inventory management'. This short reading covers the wide range of topics that we will touch upon in this chapter. As such, it is a good introduction to our discussion to follow.
Broome, JT (1999), 'The benefits of smart inventory management', Nation's Business , June 1999, pp18 - 19.
From this basic understanding, we come to some important questions that an organization must address:
• What should be stocked? • When should orders be placed for more stock? • What quantity should be ordered?
The most fundamental is the first question. The answer is not straightforward.
Because stock outs are expensive, there is a risk-averting tendency in managers, which often leads to tendency to overstock. When overstocking is identified, stocks are often drastically cut and the process starts all over again. Deciding upon the timing and size of re-orders fixes the level of stocks, the amount of money tied up in inventory, the risk involved in maintaining the inventory and the service that can effectively be provided to the customer.
Holding a high level of stocks is costly. The trade-off then has to be made between lowering the level of stock, thus reducing costs, and sacrificing some of the benefits of a high level of stock. If the lower level of stock leads to a stock out, will that be acceptable? If operations have to be rescheduled due to a lack of some component in inventory, will that be acceptable occasionally?
The aim is to minimize overall cost, and the control of inventory is vital. Being vital, it has become subject to rigorous attention on the part of not only managers, but academics in the field of business. The lowest overall cost must define the various elements we have mentioned above - stock levels, amount of capital tied up in inventory, and the level of customer service that is acceptable.
Kilty, G (May 2000), 'Inventory management within the supply chain', Hospital Material Management Quarterly
, pp18 - 24.
In this reading, the writer identifies the need to study the entire chain of
events from procurement to distribution. In other words, the total cost must
be the focus of study to reduce inventory costs. Basically, inventory holding
costs can be divided into the following broad categories:
• the cost of buying one item, i.e., the purchase price
• the cost or re-ordering the item, i.e., order preparation, follow-up,
receipt of item, transport costs, quality check, and sorting
• the cost of storing the item for a given period of time
• the stock out cost.
The last one is the most complicated, possibly the highest cost, because it
involves the estimating of externalities and knock-on effects, including loss
of customer, disruption to operations, cost of overcoming these and so
forth.
Re-ordering. Looking at the first three items, we need to consider the cost
of ordering small and frequent deliveries of items against large and
infrequent ones. The small deliveries obviously cost less in direct terms but
may cost more in indirect terms when the cost of reordering and transport
etc are included. So, the frequent deliveries will have low inventory costs
but high processing costs. The reverse is true in the large deliveries but
infrequent ordering situation. In logistics related literature, we come across
a term economic order quantity (EOQ). EOQ is expressed as
Placing an order. Now that the optimum order size is decided, the next
question is: when should a re-order be placed? This depends on two
variables that we have pointed out in the last chapter - lead time and
demand. If demand remains fairly predictable, the re-order should be
placed when lead time will equal to zero stock. The new stock will then
arrive just as the existing stock is finishing. In practice, this accuracy of
prediction and consumption is the elusive grail. Organisations, therefore,
maintain a safety stock. Re-order then occurs when existing stock reaches
a level which is:
demand in the lead time + safety stock
This situation can be expressed diagrammatically, as shown in your
textbook in Figure 10-8 A basic pull inventory control model for a
replenishment part .
In the drive to solve the problems of lead times and re-order points, some
work has been done to identify best ways to control and reduce inventory
costs. One such process is a classic one - statistical process control ,
devised to solve quality problems in 1931 by Shewart. This process is
widely discussed in quality related literature but it is interesting to read its
application to the logistics context and to optimising inventory holding.
Pfhol, H-C, Cullmann, O and Stolzle, W (1999), 'Inventory management statistical process control: Simulation and evaluation', Journal of Business Logistics , vol 20, no. 1, pp 101 - 120.
Let us now step back and look at the two types of inventory controls described in the text.
3.2.2 Push and pull control methods
Push inventory control (pp340 - 342) is fairly straightforward and is based
on the fact that the product has to be stored at supplying points after
production.
The study gets a little bit more elaborate when we start looking at the Pull
Inventory Control (starting from page 342). It is useful to work through the
worked examples and calculations and understand how the process is
conducted. You will see, for instance, how a reorder point is established,
with an example given on page 340. This example is carried forward in
other places to illustrate the issues of data inaccuracies and non-
instantaneous re-supply.
The next section in the text, advanced pull inventory control , takes you
to further practical complexities that can be expected to occur in normal
operations. These take into account the concept of total cost and service
levels.
4.3 Types of inventory
Push and pull inventories are two of the main types. In this section, we will
overview the various other types of inventory that are commonly discussed
in logistics parlance.
Replenishment: This is inventory that is held for the normal process of
meeting demand in normal conditions. This occurs when demand and lead
times are accurately known. When this happens, no added level of stock
needs to be held. Sometimes this inventory is called 'cycle stock'.
Pipeline: Described well in your text on page 374, this is stock that is in
transit between one place and another. Cargo carried on ships is often
pipeline or in-transit stock.
Safety: This is the inventory maintained when there is uncertainty, e.g., in
lead time or demand or a combination of both. This inventory is sometimes
called buffer stock. We have studied aspects of it in the previous section,
when making calculations in the pull system.
Speculative: This inventory is held as an asset to be benefited from later.
Examples include bulk buying and receiving rebates or holding stock to
cover expected shortages of material or labour. Ships are sometimes
known to carry cargo between countries that they have carried in the
opposite direction earlier. This is also speculative holding and subsequent
trading on the world market. Another form of speculative inventory is
seasonal purchase of stock to be used or traded later in the year when
availability is poorer.
Obsolete: This is stock for which demand no longer exists. This can be true
for the whole company or for just one holding location. If it is for just one
location, this stock is usually transferred to where it can be used.
3.4 Inventory management
Inventory means various things to various people, even within one
organisation. The inventory manager sees it as his responsibility; the
purchaser sees it as stock that is available to him; the materials manager
sees it as something that he needs to maintain at certain levels; the
accountant sees it as dollars. For all of them, dynamic inventory control
gives real data on which they can base their decisions. Scanning an item at
the time of sale provides information on consumption, available stock, any
necessary adjustments to existing processes of re-ordering, moving over-
stocks to places where demand is high. Electronic point of sale (EPOS)
systems are widely used to provide such dynamic management but they
should be regularly reconciled with the actual holdings to adjust for
damage, theft or other inaccuracies that might creep into the system.
ABC classification. One of the basic principles in inventory management
is ABC classification, based on the Pareto principle, which says that 20% of
the product generates 80% of the sales. The ABC classification system is
described with an example in your text. Basically, the principle it follows is
this: the top 10% of the items are placed in class A, the next group in class
B and the slowest in class C. Each group is handled separately, keeping in
mind their particular market characteristics.
The next reading illustrates the use of the ABC classification and shows
how that can be used to better the returns on investment.
Petry C (June 2001), 'Key calculations for effective inventory control',
Metal Center News, pp. 1 - 33.
Very rarely can a logistics manager look at all his inventory and keep visual
track of it. Often, inventory of large organisations is spread out all over the
world, some of it in the 'pipeline' mode in transit on ships, aircraft, or on
various land transport modes. To be able to effectively manage his
inventory, the manager has to maintain records that can be adjusted
continually to replicate sales, purchases, deliveries and so forth.
The basic form of record keeping is the scratch-in, scratch-out method in
which each item is added or deleted manually. Clearly, this is not practical
in most operations these days and sophisticated computer systems are
used to perform essentially the same function, but with much more
functionality added in the form of inputs and available outputs.
3.4.1 Inventory management systems
Bjork R (December 2000), 'Inventory management systems', Internal
Auditor , pp40 - 44.
This paper focuses not only on the management of inventory but also on
how the organisation runs its business. The point is made that, regardless
of the systems used, it is the people who make the systems work.
Tracking procedures become more important when inventory is spread over
many points. In organisations that have global operations, this can be seen
to be crucial to their functioning effectively. Even for operations that are
much smaller in scale, inventory management systems play a crucial role
that underpins the commercial success of the organisation. In the aviation
industry, for example, inventory is maintained at various points around the
globe but can be accessed from any location. On the other hand, small
businesses that have a few outlets only can decide to pool inventory for all
outlets in one place and manage it centrally. Some items in the inventory
are easier to track because regulations require that they be suitably
numbered and identified (pharmaceuticals, vehicles, spare parts for
machinery are examples) but other items (clothes, for instance) may not be
so formally tracked. Such items are then tracked by the organisation's
inventory management systems.
Bar coding. Historically, supermarkets have been taking the lead in
developing responsive inventory management systems. When Toyota were
devising their JIT system, they studied the processes of supermarkets
carefully to see what lessons could be learnt. The most frequently used
method of inventory management in supermarkets is bar coding. Bar codes
are commonly based on the universal product code (UPC). If you consider
the usual experience of supermarket shopping, you see that the customer
collects their purchases and goes to the checkout where the items are
scanned. If there is a supermarket store card in the name of the customer,
this is scanned first. This links the customer to the purchase that is being
made. The information is recorded in a computer that provides the checkout
operation with the price, any tax, any special offers that may apply, and any
regulatory restrictions that may be in place. It provides the total cost of
purchase and prints out the receipt.
On the other side of the transaction, the system is recording particular
customer preferences and shopping patterns, as well as the items that have
been removed from the inventory. In this way, bar codes help to monitor
stock levels and instigate re-order procedures. The result of using bar
codes is efficient movement of stock from supplier to customer and a drop
in the amount of stock that has to be stockpiled. When allied to a customer
card, a large amount of data on the customer can be maintained which
helps when designing promotions aimed at specific groups of customers.
Bar codes use the thickness and separation between bars to code
information. The scan can read the full information in very quick time.
Generally, bar codes are mono-dimensional, which limits to some extent the
amount of information that can be stored in the code. There is a move
towards the use of two dimensional codes, e.g., with UPS. The drawback of
these is that they must be scanned in two dimensions for all the information
to be read.
Increasingly, containers are tracked through terminals by scanning the
barcodes on them as they go on their journey, often without stopping at the
gate. This speeds up movement of cargo while maintaining track of their
movement.
Wireless tracking. Sometimes called radiofrequency identification (RFID),
this method uses small transponders and readers that are linked to an
information management system. This allows the tracking of a large range
of items. The technology is applied in a wide range of logistics operations,
from automatic handling in terminals and warehouses to production line
functions. The versatile nature of this technology permits its application in
areas which can be unfriendly to human presence, such as, toxic
environments, heat and other micro atmospheres which can degrade
human performance.
The fundamentals of the working of this technology are that the transponder
responds to a signal from an antenna and sends back a signal. This
information can be merely recorded or rewritten into another function and
exchanged with a control or activating system. This allows operations in the
dark, permits automation in a wide range of activities and keeps operating
costs low and tracks tagged items in real time. Incrementally, this
technology is replacing bar codes.
Global positioning systems (GPS). These systems use an array of
satellites to produce very accurate location coordinates. GPS is widely used
to track vehicles, ships, aircraft, containers, and shipments. The use of this
system allows, in conjunction with the organisation's management
communications systems or the Internet, the availability of real time tracking
and location of items or shipments. The widespread use of this technology
has made it a base technology for managing the logistics chain.
4.4.2 Computers and inventory management
Computing power remains the platform on which all modern inventory
management systems depend. Special software is constantly being
developed and integrated to manage inventory; and computing hardware
provides more and more effective computers on which to run the software.
When bar coding, for example, RFID and GPS are linked together with a
wider management system, and a streamlined logistics management
process evolves. Within this process specific components can be identified
for which specialised software is used. Examples include warehousing